I'm as skeptical about estimates of gains/losses from trade agreements as I am about trade polling. How many jobs will be added/lost? How much will GDP rise/fall? I'm not sure there are any good answers out there, although I think economists should keep trying to find them. As of now, though, I have doubts about many of the figures they come up with. This is from The Economist:
THE Trans-Pacific Partnership (TPP), a putative trade agreement, would ease commerce between America, Japan and ten other countries that between them account for two-fifths of global GDP. But how beneficial would it be to these economies? Advocates claim it would boost their output by nearly $300 billion in a decade. Critics say it would make little or no difference.
The disagreement reflects the difficulty of gauging the impact of free-trade agreements. Almost all economists accept the benefits of free trade as laid out in the early 1800s by David Ricardo. Countries do well when they focus on what they are relatively good at producing. But Ricardo looked at only two countries making two products, at a time when few non-tariff barriers such as safety standards existed. This renders his elegant model about as useful for analysing contemporary free-trade deals as a horse and carriage are for predicting the trajectory of an aircraft.
Instead, most economists use what is known as computable general equilibrium (CGE) analysis. CGE models are built on top of a database that seeks to describe economies in full, factoring in incomes, profits and more. Researchers line things up so that the model yields the same output as a real benchmark year. Once that is achieved, they “shock” the model, adjusting trade barriers to see how outcomes shift, both immediately and over time.
There is much to recommend CGE. It is the only trade model broad enough to encompass services, investment and regulations, all of which lie at heart of the TPP debate. It also generates predictions that policymakers want: which sectors will do well and how incomes will change. But CGE has big drawbacks. First, it is dependent on data, which can be very patchy in some areas. Second, faulty assumptions can quickly lead forecasts astray.
Studies of TPP illustrate these strengths and weaknesses. The most influential, by Peter Petri, Michael Plummer and Fan Zhai, for the East-West Centre, a research institute, forecasts that the deal would raise the GDP of the 12 signatories by $285 billion, or 0.9%, by 2025. It is their numbers that America’s government cites when it says TPP will make the country $77 billion richer. Their model tries to avoid some of the common failings of CGE. Their assumptions are transparent, include a range of scenarios and are often conservative—for example, they expect only slow and partial implementation. That makes the results more credible.
Yet subjective elements of the model have a huge impact. The authors use a new approach to predict that more firms will become exporters as the costs of trade decrease. That may be an improvement over previous theories, which assumed a constant number of exporters, but this one tweak greatly changes results: it makes the benefits some 70% bigger, according to a study for Canada’s C.D. Howe Institute by Dan Ciuriak and Jingliang Xiao.
Some assumptions are also debatable. The researchers calculate that increased protection of intellectual property (IP) is beneficial for all countries. A review of studies of TPP funded by the British government, by Badri Narayanan, Mr Ciuriak and Harsha Vardhana Singh, questions that. Stronger protection for IP should spur more investment by producers. But it can also raise costs for consumers beyond what is necessary to encourage innovation and slow the spread of technology to developing nations.
I would love to see a detailed analysis of how all of the various provisions of the TPP, once it is completed, will affect economic welfare. But I suspect that we do not have the tools for much of this. What is the impact of extending copyright terms from life of the author plus 50 years to life of the author plus 70 years in some TPP countries? How about having enforceable obligations -- which may or may not be enforced in practice -- for illegal logging? These and other questions may just be "known unknowns," at least in quantitative terms. It may be better just to focus on the qualitative arguments.
